PIMCO’s Mohamed El-Erian sees the future (in the FT):
The debacle in housing is at the root of the dislocation that is forcing the banks’ balance sheet implosion, sapping investors’ risk appetite and helping to pull the rug from underneath other credit facilities (with the most recent example being car leases) – all of which drive the ongoing morphing of the credit crunch into widespread economic weakness.
Given the outlook for a further decline in house prices, there is simply not enough cash on the sidelines willing to absorb banks’ asset sales and provide the necessary new capital. Valuations will have to go even lower. As this occurs and contaminates other segments of the US economy, we are likely to witness a long-lasting change in the institutional configuration of the US banking system, with a highly differentiated impact on bond and equity holders.
Some smaller and medium-sized banks will be unable to find partners to recapitalise them and enhance their balance sheets. They will fail; the Federal Deposit Insurance Corporation will step in to protect eligible deposits and equity and bond holders will take another hit. Other banks will fare better. Due to their valuable core businesses, they will find partners to finance them directly or through mergers and acquisitions. Bond holders will do better while equity holders will continue to face downside.
The third group of banks will gain medium- term strength. They will take advantage of the systemic dislocations to acquire cheap assets and business units, thereby expanding their profitable activities. In the process, both bond and equity holders will benefit.
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